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CONCEPTUAL FRAMEWORK
2-2 LO 1
CONCEPTUAL FRAMEWORK
2-4 LO 2
ASSUMPTIONS PRINCIPLES CONSTRAINTS
1. Economic entity 1. Measurement 1. Cost
2. Going concern 2. Revenue recognition
Third level
3. Monetary unit 3. Expense recognition The "how"
4. Periodicity 4. Full disclosure implementation
5. Accrual
QUALITATIVE
CHARACTERISTICS ELEMENTS
1. Fundamental 1. Assets
qualities 2. Liabilities Second level
2. Enhancing 3. Equity Bridge between
qualities 4. Income
levels 1 and 3
5. Expenses
ILLUSTRATION 2-7
Conceptual Framework
for Financial Reporting OBJECTIVE
Provide information
about the reporting
entity that is useful
to present and potential First level
equity investors, The "why"purpose
lenders, and other of accounting
creditors in their
capacity as capital
2-5 providers.
FIRST LEVEL: BASIC OBJECTIVE
OBJECTIVE
To provide financial information about the reporting entity
that is useful to present and potential equity investors,
lenders, and other creditors in making decisions about
providing resources to the entity.
2-6 LO 3
SECOND LEVEL: FUNDAMENTAL CONCEPTS
2-7 LO 4
SECOND LEVEL: FUNDAMENTAL CONCEPTS
ILLUSTRATION 2-2
Hierarchy of Accounting
Qualities
2-8 LO 4
Relevance
ILLUSTRATION 2-7
Conceptual Framework
for Financial Reporting
2-9 LO 4
SECOND LEVEL: FUNDAMENTAL CONCEPTS
Fundamental QualityRelevance
2-10 LO 4
SECOND LEVEL: FUNDAMENTAL CONCEPTS
Fundamental QualityRelevance
Fundamental QualityRelevance
2-12 LO 4
SECOND LEVEL: FUNDAMENTAL CONCEPTS
Fundamental QualityRelevance
ILLUSTRATION 2-7
Conceptual Framework
for Financial Reporting
2-14 LO 4
SECOND LEVEL: FUNDAMENTAL CONCEPTS
2-15 LO 4
SECOND LEVEL: FUNDAMENTAL CONCEPTS
2-16 LO 4
SECOND LEVEL: FUNDAMENTAL CONCEPTS
2-17 LO 4
SECOND LEVEL: FUNDAMENTAL CONCEPTS
2-18 LO 4
SECOND LEVEL: FUNDAMENTAL CONCEPTS
Enhancing Qualities
2-19 LO 4
SECOND LEVEL: FUNDAMENTAL CONCEPTS
Enhancing Qualities
2-20 LO 4
SECOND LEVEL: FUNDAMENTAL CONCEPTS
Enhancing Qualities
2-21 LO 4
SECOND LEVEL: FUNDAMENTAL CONCEPTS
Enhancing Qualities
2-22 LO 4
Basic Elements
ILLUSTRATION 2-7
Conceptual Framework
for Financial Reporting
2-23 LO 5
SECOND LEVEL: BASIC ELEMENTS
Elements of Financial Statements
Equity
Income
Expenses
2-24 LO 5
SECOND LEVEL: BASIC ELEMENTS
Elements of Financial Statements
Asset
A present obligation of the entity arising
from past events, the settlement of which
Liability
is expected to result in an outflow from the
entity of resources embodying economic
Equity benefits.
Income
Expenses
2-25 LO 5
SECOND LEVEL: BASIC ELEMENTS
Elements of Financial Statements
Asset
Liability
Income
Expenses
2-26 LO 5
SECOND LEVEL: BASIC ELEMENTS
Elements of Financial Statements
Asset
Liability
Asset
Liability
ILLUSTRATION 2-7
Conceptual Framework for
Financial Reporting
2-32 LO 6
THIRD LEVEL: ASSUMPTIONS
Basic Assumptions
Economic Entity company keeps its activity separate from its
owners and other business unit.
2-34 LO 6
THIRD LEVEL: BASIC PRINCIPLES
Measurement Principles
Historical Cost is generally thought to be a faithful
representation of the amount paid for a given item.
IASB has given companies the option to use fair value as the
basis for measurement of financial assets and financial
liabilities.
2-35 LO 7
THIRD LEVEL: BASIC PRINCIPLES
Measurement Principles
IASB established a fair value hierarchy that provides insight into
the priority of valuation techniques to use to determine fair value.
ILLUSTRATION 2-4
2-36 LO 7
THIRD LEVEL: BASIC PRINCIPLES
Revenue Recognition
When a company agrees to perform a service or sell a product to
a customer, it has a performance obligation.
2-37 LO 7
THIRD
LEVEL:
BASIC
PRINCIPLES
Illustration: Assume
the Airbus (DEU) signs
a contract to sell
airplanes to British
Airways (GRB) for
100 million. To
determine when to
recognize revenue,
Airbus uses the five
steps for revenue
recognition shown at
right.
ILLUSTRATION 2-5
2-38 The Five Steps of
Revenue Recognition
THIRD LEVEL: BASIC PRINCIPLES
2-39 LO 7
THIRD LEVEL: BASIC PRINCIPLES
Full Disclosure
Providing information that is of sufficient importance to
influence the judgment and decisions of an informed user.
Provided through:
Financial Statements
Supplementary information
2-40 LO 7
THIRD LEVEL: BASIC PRINCIPLES
BE2-9: Identify which basic principle of accounting is best
described in each item below.
(a) Parmalat (ITA) reports revenue in its income Revenue
statement when it delivered goods instead of when Recognition
the cash is collected.
(b) Google (USA) recognizes depreciation expense for Expense
a machine over the 2-year period during which that Recognition
machine helps the company earn revenue.
(c) KC Corp. (USA) reports information about pending Full
lawsuits in the notes to its financial statements. Disclosure
(d) Fuji Film (JPN) reports land on its statement of
financial position at the amount paid to acquire it,
even though the estimated fair market value is Measurement
greater.
2-41 LO 7
THIRD LEVEL: COST CONSTRAINT
Cost Constraint
Companies must weigh the costs of providing the information
against the benefits that can be derived from using it.
2-42 LO 8
THIRD LEVEL: COST CONSTRAINT
2-43 LO 8
Summary of
the Structure
ILLUSTRATION 2-7
Conceptual Framework
for Financial Reporting
2-44 LO 8